nep-eec New Economics Papers
on European Economics
Issue of 2023‒05‒22
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Fiscal Transfers and Common Debt in a Monetary Union: A Multi-Country Agent Based-Stock Flow Consistent Model By Alessandro Caiani; Ermanno Catullo
  2. Between a rock and a hard place. Long-term drivers of EU structural vulnerability By Dario Guarascio; Jelena Reljic; Giacomo Cucignatto; Giuseppe Celi; Annamaria Simonazzi
  3. Breaks in the Phillips Curve: Evidence from Panel Data By Simon Smith; Allan Timmermann; Jonathan H. Wright
  4. Costly, but (Relatively) Ineffective? An Assessment of Germany’s Temporary VAT Rate Reduction During the Covid-19 Pandemic By Victoria Baudisch; Matthias Neuenkirch
  5. A snapshot of Central Bank (two year) forecasting: a mixed picture By Goodhart, C. A. E.; Pradhan, Manoj
  6. Income inequality, top shares of income and social classes in the 21st century By Luca Giangregorio; Davide Villani
  7. A production network model for the Spanish economy with an application to the impact of NGEU funds By Alejandro Fernández-Cerezo; Enrique Moral-Benito; Javier Quintana
  8. UK monetary and fiscal policy since the Great Recession- an evaluation By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wang, Ziqing
  9. Federal Unemployment Reinsurance amid Local Labor-Market Policy By Marek Ignaszak; Philip Jung; Keith Kuester
  10. A tale of two margins: monetary policy and capital misallocation By Silvia Albrizio; Beatriz González; Dmitry Khametshin
  11. Do Renewables Create Local Jobs? By Natalia Fabra; Eduardo Gutiérrez; Aitor Lacuesta; Roberto Ramos
  12. Inflation persistence, noisy information and the Phillips curve By José-Elías Gallegos
  13. Downward Revision of Investment Decisions after Corporate Tax Hikes By Link, Sebastian; Menkhoff, Manuel; Peichl, Andreas; Schüle, Paul
  14. On the drivers of financial literacy: the role of intergenerational mobility By Sara Lamboglia; Massimiliano Stacchini
  15. Assessment of generation adequacy taking into account the dependence of the European power system on natural gas By Maike Spilger; Dennis Schneider; Christoph Weber
  16. The value of host-country language: The effect of Dutch language proficiency on immigrants’ income, savings and financial wealth in the Netherlands By Zheng, Yeqiu; Gu, Yan; Backus, Albert; van Soest, Arthur

  1. By: Alessandro Caiani; Ermanno Catullo
    Abstract: Using a refined version of the multi-country AB-SFC model of a Monetary Union already presented in Caiani et al. (2018a, 2019) the paper aims at providing a tentative assessment of the economic effects of transforming the European Monetary Union into an Intergovernmental Fiscal Transfer Union (IFTU) with its own fiscal capacity. Countries contribute proportionally to their GDP whereas funds are redistributed according to a mechanism that gives more funds to countries performing worse than the average of the Union in cyclical terms. Our simulations show that an IFTU inspired by such a redistribution principle acts as a stabilizer of international trade, allowing to stabilize and improve the Union GDP performance without affecting the stability of public finances. When the Union is allowed to borrow on capital markets, i.e. in a Fully-Fledged Fiscal Transfer Union (FFFTU), these effects are enhanced and a part of the public debt burden shifts from the national to the Union level, leaving the total burden almost stable. An interesting result to assess the political acceptability of the proposal is that 'core' countries eventually benefit the most from the introduction of this mechanism, despite being more frequently net contributors. Finally, we show that an FFFTU with common debt might help to soften the impact of an exogenous demand shock while, because of the fact that it mainly operates as a stabilizer of aggregate demand, it does not seem to provide beneficial effects when facing a supply shock to production.
    Keywords: Fiscal Transfer Union; Union Bonds; European Integration; Agent Based Macroeconomics; Stock Flow Consistent Models.
    Date: 2023–05–05
  2. By: Dario Guarascio; Jelena Reljic; Giacomo Cucignatto; Giuseppe Celi; Annamaria Simonazzi
    Abstract: This work analyses the European Union's structural vulnerability vis-Ã -vis a global economy that is increasingly divided into two opposing blocks with ever more 'weaponized' interdependencies. First, we provide an empirical assessment of EU's vulnerability focusing on four main dimensions – demand, supply, technology and critical raw materials. Second, we provide a comprehensive theoretical framework identifying the major drivers of vulnerability. The latter are associated with the German-centered export-led growth model that has largely shaped the European economy during the last twenty years. Three are the (intertwined) key drivers: demand-repression, fallacious economic policy set-up and core-periphery divide. Finally, we analyse the recent revival of industrial policy in Europe discussing whether and to what extent such policies, particularly those directed at accelerating digitalization and energy transition, might be able to reduce vulnerability.
    Keywords: Structural vulnerability; Strategic autonomy; Industrial policy; Core-Periphery
    JEL: F02 F15 F45 F55
    Date: 2023–03
  3. By: Simon Smith; Allan Timmermann; Jonathan H. Wright
    Abstract: We revisit time-variation in the Phillips curve, applying new Bayesian panel methods with breakpoints to US and European Union disaggregate data. Our approach allows us to accurately estimate both the number and timing of breaks in the Phillips curve. It further allows us to determine the existence of clusters of industries, cities, or countries whose Phillips curves display similar patterns of instability and to examine lead-lag patterns in how individual inflation series change. We find evidence of a marked flattening in the Phillips curves for US sectoral data and among EU countries, particularly poorer ones. Conversely, evidence of a flattening is weaker for MSA-level data and for the wage Phillips curve. US regional data and EU data point to a kink in the price Phillips curve which remains relatively steep when the economy is running hot.
    JEL: C11 C22 E51 E52
    Date: 2023–04
  4. By: Victoria Baudisch; Matthias Neuenkirch
    Abstract: We evaluate Germany’s temporary value-added tax (VAT) rate reduction as a tool to stimulate consumer spending during the Covid-19 pandemic using a comparative case study approach. We construct a credible counterfactual for Germany in a two-step procedure. First, we carry out a careful pre-selection of the donor pool countries to obtain a control group that is highly similar to Germany regarding important post-treatment characteristics. Second, we apply a reweighting scheme on the pre-selected donor countries. The synthetic control group only differs from Germany in the way that it did not implement the temporary VAT rate reduction. Our results indicate that the German VAT cut policy and partial VAT reductions in other countries were relatively ineffective in stimulating consumption with regards to their costs when compared to other measures such as (targeted) direct cash transfers. We attribute this to the fact that direct cash transfers are more comprehensible, salient, and actionable, in particular, in a dynamic environment with high uncertainty induced by unclear future economic prospects.
    Keywords: Consumption, Covid-19, Synthetic Control, Temporary VAT Cut, Unconventional Fiscal Policy
    JEL: E21 E62 E65 H31
    Date: 2023
  5. By: Goodhart, C. A. E.; Pradhan, Manoj
    Abstract: Central Banks normally adjust monetary policy so that inflation hits the Inflation Target (IT) within two years. Since a central bank must believe its policy stance is appropriate to achieve this goal, its inflation forecast at the two-year horizon should generally be close to target. We examine whether this has held for three main Central Banks, Bank of England, ECB and Fed. During the IT period, there have been two crisis periods, The Great Financial Crisis (GFC), and then Covid/Ukraine. We examine how the two-year forecasts differed depending on whether we were in a crisis, or more normal, period. Although over the whole IT period, up until 2022, both forecasts and outcomes were commendably close to target, we found that this was due to a sizeable forecast underestimate of the effects of policy and inherent resilience to revive inflation after each crisis hit, largely offset by an overestimate of the effect of monetary policy to restore inflation to target during more normal times. We attribute such latter overestimation to an unwarranted belief in forward looking, ‘well anchored’, expectations amongst households and firms, and to a failure to recognise the underlying disinflationary trends, especially in 2010-2019. We outline a novel means for assessing whether these latter trends were primarily demand driven, e.g. secular stagnation, or supply shocks, a labour supply surge. Finally, we examine how forecasts for the uncertainty of outcomes and relative risk (skew) to the central forecast have developed by examining the Bank of England’s fan chart, again at the two-year horizon.
    Keywords: forecasting; expectations
    JEL: D10 D21 D80 D89 E17 E31 E37 E47 E59
    Date: 2023–03–29
  6. By: Luca Giangregorio (Pompeu Fabra University); Davide Villani (Joint Research Center (EC))
    Abstract: This paper aims at providing new evidence about the link between personal and functional distribution and top-shares composition. We apply a novel class scheme based on two key features of contemporary capitalism i.e., individuals/households receiving multiple types of incomes, and the role of managers. The empirical application in Germany, Spain, and Italy over the period 2000-2017 reveals two main results. First, we observe a direct link between personal and functional distributions. In particular, a marginal increase in wages received by labourers would reduce inequality, whereas those received by capitalist households would increasing it. Second, we find that a significant portion of labour income at the top of the income distribution corresponds to wages received by capitalist households. We conclude that although the linear correspondence between income source and class location is more blurred today than it was 200 years ago, a class divide is still clear.
    Keywords: Income inequality, Functional income distribution, Personal income distribution, Social classes, Top shares of income
    JEL: E25
    Date: 2023–05
  7. By: Alejandro Fernández-Cerezo (Banco de España); Enrique Moral-Benito (Banco de España); Javier Quintana (Banco de España)
    Abstract: This paper introduces a sectoral model for the Spanish economy that allows a better understanding of the propagation of sector-specific shocks taking into account different network interdependencies. In particular, the model features sector interactions along several dimensions in an open economy setting, either in the provision of intermediate inputs and capital goods or competing in the labour market. This framework is flexible enough to provide insights into the effect of several policy-relevant shocks, such as global value chain bottlenecks, increases in production costs in energy-intensive sectors or large public investment programmes. In order to illustrate the role of such sectoral interactions, we consider a sectorisation of Next Generation EU (NGEU) funds based on Spain’s Recovery, Transformation and Resilience Plan (RTRP) which will mobilize €69.5 bn in grants. According to our findings, the average impact over a 5-year horizon is 1.15% of GDP if we consider only the direct effect of the investment programmes and expenditure plans, but it increases to 1.75% if we take into account the increase in the productive capacity of certain sectors and its propagation through the production network. Moreover, the resulting expansion is particularly strong in sectors highly dependent on high-skilled labour, such as IT and professional services, which might lead to shortages of high-skilled workers, reducing the aggregate impact on GDP by 25%.
    Keywords: input-output models, industrial policy, public investment, Next Generation EU
    JEL: C67 O25 L16 H54 E65 O52
    Date: 2023–01
  8. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wang, Ziqing (Sheffield Hallam University, Sheffield, United Kingdom)
    Abstract: This paper explores the economic impacts of the Bank of England’s quantitative easing policy, implemented as a response to the global financial crisis. Using an open economy Dynamic Stochastic General Equilibrium (DSGE) model, we demonstrate that monetary policy can remain effective even when nominal interest rates have reached the zero lower bound. We estimate and test the model using the indirect inference method, and our simulations indicate that a nominal GDP targeting rule implemented through money supply could be the most effective monetary policy regime. Additionally, our analysis suggests that a robust, active fiscal policy regime with nominal GDP targeting could significantly enhance economic stabilization efforts.
    Keywords: Quantitative easing, Financial friction, SOE-DSGE, Indirect inference, Zero bound
    JEL: E44 E52 E58 C51
    Date: 2023–04
  9. By: Marek Ignaszak; Philip Jung; Keith Kuester
    Abstract: Consider a union of atomistic member states. Idiosyncratic business-cycle shocks cause persistent differences in unemployment. Private cross-border risk-sharing is limited. A federal unemployment-based reinsurance scheme can provide transfers to member states in recession, which helps stabilize local unemployment. Limits to federal generosity arise because member states control local labor-market policies. Calibrating the economy to a stylized European Monetary Union, we find that moral hazard puts notable constraints on the effectiveness of federal reinsurance. This is so even if payouts are indexed to member state’s usual unemployment rate or if the federal level pays only in severe-enough recessions.
    Keywords: Unemployment reinsurance, fiscal risk sharing, labor-market policy, fiscal federalism, search and matching
    JEL: E32 E24 E62 H77
    Date: 2023–04
  10. By: Silvia Albrizio (International Monetary Fund); Beatriz González (Banco de España); Dmitry Khametshin (Banco de España)
    Abstract: This paper explores the impact of monetary policy on capital misallocation through its heterogeneous effects on firms. Using Spanish firm-level data covering the period 1999-2019, we show that an expansionary monetary policy shock leads to a decrease in capital misallocation, as measured by the within-industry dispersion of firms’ marginal revenue product of capital (MRPK). To analyse the mechanism behind this finding, we first explore the intensive margin and show that high-MRPK firms increase their investment and their debt financing relatively more than low-MRPK firms after monetary policy easing. We also document that a firm’s MRPK is a much stronger driver of its investment sensitivity to monetary policy than its age, leverage or cash. These findings suggest that MRPK is a good proxy for financial frictions. Second, we explore the extensive margin and show that monetary policy easing increases entry and decreases exit, although the effect is quantitatively small, and it does not lead to significant changes in the composition of high- and low-MRPK entrants or exiters. Overall, the evidence points to expansionary monetary policy decreasing capital misallocation mainly through the relaxation of financial frictions of incumbent, productive, constrained firms.
    Keywords: monetary policy, financial frictions, investment, misallocation, productivity
    JEL: D22 D24 E22 E32 E52 O11 O4
    Date: 2023–01
  11. By: Natalia Fabra (UNIVERSIDAD CARLOS III); Eduardo Gutiérrez (Banco de España); Aitor Lacuesta (Banco de España); Roberto Ramos (Banco de España)
    Abstract: We investigate whether investments in renewable energy – solar and wind plants – create jobs in the municipality where they are located. Using 13 years of monthly data, we exploit the variation in the timing and size of investment projects across more than 3, 200 municipalities in Spain, a country with substantial investments in this area. We use a new estimator for staggered differences-in-differences analysis that extends the local projections approach with clean controls (Dube et al., 2022). We find strong heterogeneity in the magnitude and pattern of the impacts of solar and wind investments. On average, solar investments increase employment by local firms, but the effects on the unemployment of local residents are weak. The effects of wind investments on local employment and unemployment are mostly non-significant. These findings have important implications for public policy.
    Keywords: renewable energy, employment, unemployment, NIMBY, spatial effects
    JEL: L94 C33 O25 R23
    Date: 2023–01
  12. By: José-Elías Gallegos (Banco de España)
    Abstract: A vast literature has documented how US inflation persistence has fallen in recent decades, but this finding is difficult to explain in monetary models. Using survey data on inflation expectations, I document a positive co-movement between ex-ante average forecast errors and forecast revisions (suggesting forecast sluggishness) from 1968 to 1984, but no co-movement thereafter. I extend the New Keynesian setting to include noisy and dispersed information about the aggregate state, and show that inflation is more persistent in periods of greater forecast sluggishness. My results suggest that changes in firm forecasting behavior explain around 90% of the fall in inflation persistence since the mid-1980s. I also find that the changes in the dynamics of the Phillips curve can be explained by the change in information frictions. After controlling for changes in information frictions, I estimate only a modest decline in the slope. I find that a more significant factor in the dynamics of the Phillips curve is the shift towards greater forward-lookingness and less backward-lookingness. Finally, I find evidence of forecast underrevision in the post-COVID period, which explains the increase in the persistence of current inflation.
    Keywords: inflation persistence, Phillips curve, noisy information
    JEL: E31 E32 E52 E70
    Date: 2023–02
  13. By: Link, Sebastian (Ifo Institute for Economic Research); Menkhoff, Manuel (Ifo Institute for Economic Research); Peichl, Andreas (Ludwig-Maximilians-Universität München); Schüle, Paul (Ifo Institute for Economic Research)
    Abstract: This paper estimates the causal effect of corporate tax hikes on firm investment based on more than 1, 400 local tax changes. By observing planned and realized investment volumes in a representative sample of German manufacturing firms, we can study how tax hikes induce firms to revise their investment decisions. On average, the share of firms that invest less than previously planned increases by three percentage points after a tax hike. This effect is twice as large during recessions.
    Keywords: investment, corporate taxation, state dependence, business cycle
    JEL: G11 H25 H32 H71 O16
    Date: 2023–04
  14. By: Sara Lamboglia (Bank of Italy); Massimiliano Stacchini (Bank of Italy)
    Abstract: Individual characteristics, such as educational background, are important but insufficient to explain variation in financial skills among people. Using repeated cross-sectional survey data on over 145, 000 individuals aged 50+ and resident in 20 European countries and Israel combined with historical country-level data, we explore the role that selected country characteristics play in stimulating financial awareness. We find a lasting effect of social mobility on financial skills: individuals who spent early adulthood in countries characterized by high intergenerational mobility proved to be more financially literate than their peers as they age. The effect is economically sizable, especially among women and individuals from disadvantaged backgrounds. The results hold in models that use country-specific cohort effects to absorb context confounders and common shocks. Our findings suggest that promoting equality of opportunities across generations is not only ethically desirable but can also enhance socially valuable spillovers such as the accumulation of skills among vulnerable citizens.
    Keywords: financial literacy, intergenerational mobility, gender gap
    JEL: G53 J62
    Date: 2023–04
  15. By: Maike Spilger; Dennis Schneider; Christoph Weber (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen)
    Abstract: Reductions in gas supply following the Russian invasion of Ukraine have affected the security of supply of the European power system along with other stress factors like low availability of French nuclear reactors. Consequently, more sophisticated approaches to investigate generation adequacy and to anticipate risks in security of supply are needed. Especially a thorough assessment of generation adequacy taking into account both the variability of renewable infeed and the availability of thermal power plants based on a probabilistic approach has been missing so far. In this paper, we apply a novel integrative approach to analyze generation adequacy in a case study for Central Western Europe during the winter half year 2022/2023. The approach makes use of a multivariate probabilistic framework built on publicly available data. For assessing generation adequacy, stochastic distributions are fitted to the data and Monte Carlo simulations are performed to identify future threats to generation adequacy. Results show that based on data available at the end of September 2022, generation adequacy (GA) was at risk in several core European countries, yet that the European interconnected power grid contributed to a strong risk reduction.
    Keywords: Security of Supply, Generation Adequacy, Probabilistic, Monte Carlo, Energy System Modeling
    Date: 2023–03
  16. By: Zheng, Yeqiu; Gu, Yan; Backus, Albert; van Soest, Arthur
    Abstract: We study the effect of Dutch proficiency on immigrants’ labour market performance, savings and financial wealth in the Netherlands. Different from past research, we had participants (N=659) take a language proficiency test apart from self-reported assessments, and measured participants’ IQ, patience, saving intention, risk aversion, self-control, temporal focus, etc. to better control for individual characteristics. Immigrants’ labour market performance and financial wealth were initially surveyed in 2016, and then again in 2020-2021. We find that Dutch proficiency affects immigrants’ earnings (employment probabilities; income; hourly wages) in 2016 and predicts participants’ earnings in 2021 even after controlling for the baseline in 2016, individual characteristics and demographic information. Furthermore, the results for the first time reveal that language proficiency can also predict immigrants’ current and future savings and financial wealth. Importantly, using an instrumental variables approach we show that language proficiency has a causal effect. Our findings have theoretical and policy implications.
    Date: 2023–04–13

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